OCO Orders - Required Margin Explanation

An OCO feature is actually 2 different orders on the exchange - Stop Order & Limit Order. The OCO functionality to Cancel the other Order when one side is filled is an off-exchange function handled/generated by the trading platform. There is no official OCO order type with any exchange.

How does this affect or generate required margin?

Margin requirements are based off orders that will generate a new position. For example, in order to buy/sell 1 contract of the ES the day trade margin is $400. The account balance must be equal or greater than $400 for an order to buy/sell 1 contract of the ES to be accepted.

Next, let’s say the account balance is $401 and now the account is long 1 contract of the ES. An order for a sell limit or a sell stop for 1 contract will be accepted, because the order will be offsetting/closing the original long contract - not generating a new short position.

If customer attempts to place an OCO on with this position it will be rejected because the 2 orders - sell limit and sell stop - is not only an offsetting order, it also could generate a new short position.

1 long/buy position = 1 short/sell (stop or Limit) order = Net Zero

OCO = 1 long/buy position = 1 short/sell stop order & 1 short/sell limit order = Net 1 short/sell order

Example: If news or economic numbers are released, the market can become extremely volatile, there is the chance that both side/orders of the OCO could be filled before the order to cancel the other side is received by the trading platform and message sent to back to the exchange. If both orders (sell stop & sell limit) are filled - the customer’s position has thus changed from long 1 ES to now short 1 ES without enough margin/cash in the account to meet the requirements to open a new position.

Another Example, let’s say the customer wants to work 15 orders to get in the market - working 15 orders would require 15 times the day trade margins or 15 x $400 for the ES. If the account balance was less than the required 15 x $400 or $6'000, it would reject the orders due to insufficient cash to meet required margins.

Explanation of Required Margin

If account balance only allows you to get into the position, then you will only be able to work either a limit order or stop order to offset/close the existing position. Using the example above, let’s say your account balance is $6'000. You buy 15 ES contracts. This now has used all of your available cash/margin. You will only be able to place up to 15 sell orders - either stops or limits. Any sell orders greater than 15 would be greater than the 15 buys and could generate a new short position - and would be rejected due to insufficient cash/margin to work greater than 15 sell orders.

Explanation of OCO Required Margin

Original position either buy/sell (margin required) - offsetting order, either limit/stop (no margin required) - 2nd offsetting order, either limit/stop (margin required)

Example of total margin/cash required to trade 1 contract of ES with an OCO exit order:

Original position either buy/sell 1 contract of the ES ($400 margin required) - offsetting order, either limit/stop 1 contract of the ES (no margin required) - 2nd offsetting order, either limit/stop 1 contract of the ES ($400 margin required) = $800 Total Margin Required

If you are going to trade multiple contracts, multiply this above example time the number of contracts trading.

For example, 2 ES contracts will require $1'600 | 5 ES contracts will require $4'000 | 10 ES contracts will require $8'000 | etc...